Air France-KLM's 'Transform 2015' Turnaround Program
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Case Code: BSTR424 Case Length: 16 Pages Period: 2003-2012 Pub Date: 2013 Teaching Note: Not Available |
Price: Rs.500 Organization: Air France KLM Industry: Aviation Countries: Europe; Global Themes: Strategy Implementation, Turnaround Management, Reorganizing |
Abstract Case Intro 1 Case Intro 2 Excerpts
Introduction
On December 14, 2012, French-Dutch airline, Air France KLM SA (Air France-KLM), announced an addition of €500 million (USD654 million) to its savings target for 2013-14, in an effort to match the margins of its competitors. Earlier in 2012, the airline had announced a plan for a €1.4 billion investment in 2013, followed by a further €1.6 billion investment in 2014 as part of its "Transform 2015" plan. However, with the new savings target, investment would be cut by €500 million, out of which Air France would contribute €300 million while the remaining €200 million would be cut from KLM's budget.
After the changes, Air France-KLM's capital expenditure would be €1.1 billion in 2013 and €1.4 billion in 2014. "This is a necessary reduction, but given the group's younger fleet age versus competitors they have the flexibility to do it. The Transform plan is gathering pace and should be well on track to deliver," said analyst Donal O'Neill at Goodbody Stockbrokers.
Air France-KLM was formed through a merger of French and Dutch carriers in 2004. With sound financials in the initial years, the merged entity became an example of how a cross border merger could prove a success. However, from 2009, the company was struggling to remain competitive in the changing global aviation industry. In 2011, the company's net debt was at €6.5 billion, €2 billion more than it had been the previous year. The company also incurred a substantial operating loss for the fourth consecutive year in 2011. It attributed its deepening indebtedness to increasing fuel costs, competition from low-cost airlines, and the after-effects of the financial crisis. "We have been incapable of financing our investments for the past three years, as we don't generate enough cash flow," said Alexandre de Juniac (Juniac), CEO of Air France.
The company had announced the "Transform 2015" plan in January 2012. This included reducing unit costs by 10 percent and slashing €2 billion from its net debt by the end of 2014. The company also planned to cut some 5,000 odd jobs to turn around its short- and medium-haul business.
Aviation experts welcomed the restructuring initiatives of Air France-KLM. However, they were worried about whether the company would be able to achieve the targets mentioned in "Transform 2015". According to a Bank of America report published in March 2012, "the core structural longer-term issue of value destruction in this business remains unresolved".
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